The US stock rally has no fundamentals and Fed rate hikes will 'break the back' of something in markets, top economist David Rosenberg says

• This year's stock rally has been just sentiment-driven and "devoid of fundamentals", David Rosenberg said. 
• It's only a matter of time before the Fed's interest-rate increases "break the back of something" in markets, he warned.
• The next 12 months are going to be "really tough" as the lagged effects of Fed tightening kicks in, he added.

US stocks' best first-half run since 2019 was just a sentiment-driven rally "devoid of fundamentals" – and it's only a matter of time before the trend gives way thanks to the Federal Reserve's interest-rate increases, according to David Rosenberg.

The S&P 500 index jumped almost 16% in the six months through June, buoyed by investor excitement over artificial intelligence and bets that the Fed is close to ending its policy tightening. The gauge slid 19% in 2022 as the central bank's rate increases – aimed at taming inflation – undermined investor sentiment.

However, equities' rebound this year was driven more by "sentiment and momentum" rather than better economic prospects, Rosenberg said in a CNBC interview Thursday. The veteran economist has long been bearish on the US economy, warning a recession has already hit US corporate profits, and that stocks will plunge back into a bear market when a broader downturn sets in.

"I don't know if the market is telling you anything about earnings, anything about the economy. It's been a sentiment and momentum-driven market, I think rather devoid of the fundamentals. And at some point, the Fed's tightening, which is unending, is going to break the back of something," he told the outlet.

The Rosenberg Research chief said there's a risk the Fed will hike interest rates by two or more times this year – and that's bad news for the US economy. Rising interest rates boost debt costs for companies and individuals, discouraging investment and spending.

"The next 12 months is going to be really rough. That's when all the lags of the Fed are really going to be kicking in hard," he said.

The Fed has boosted benchmark rates by 500 basis points since March 2022 – the steepest increase since the 1980s. 

"I don't think this Fed has confidence in its forecast or confidence in its models. It is basically telling us that it is data-dependent. But I've never seen a central bank so focused on the data that are inherently contemporaneous and lagging," Rosenberg said.